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Hornung: Buyers need to buyer's market at the door

It almost sounds like the name of a play: How to succeed in a low-inventory, high-demand home market which is very trying.

While it’s not the name of a Broadway show, the Front Range real estate market can lead to a lot of drama if you are in the search for a home in certain neighborhoods.

“This market has shifted more rapidly than anyone would have predicted,” said Lane Hornung, President, CEO and Co-founder of 8z Real Estate and COhomefinder.com.

With the year-over-year inventory of unsold homes down 42.5 percent and under contracts up almost 20 percent, bidding wars for homes are becoming increasingly common in along the Front Range.

“Whether it is sustainable is debatable,” Hornung said. “But certainly the reality is that in today’s market if you are trying to buy in the sub-$400,000 price range (sub-$600,000 in places like Boulder), there is a high likelihood you are going to run into multiple offers.”

The suddenly shifting market is the subject of this month’s question-and-answer session between Lane and John Rebchook, of InsideRealEstateNews.com

John: While the low inventory is welcome news for sellers, it is a real challenge for buyers. How does a buyer prepare for a shortage of homes and increased competitors?

Lane: First, if you are trying to buy in one of those markets where there is a shortage of homes and a lot of interest, you have to get rid of the mindset that it is still a buyer’s market. Just leave that at the door.

John: Can you elaborate on that a bit?

Lane: If you are in an area that is a seller’s market, you have to dispense with the notion that you are going to be able to buy a home for 85 or 90 percent of the list price. Ultimately, that mindset will hurt no one but you.

John: It’s a sea-change from not that long ago when a buyer could take their time and look at 30 or 40 homes and feel no sense of urgency, isn’t it?

Lane: It is a tough time to be a buyer. This is a market that has changed so quickly that it has even taken professionals by surprise. If we get some more supply, we could end up with a market a bit more in balance. But you have to be prepared with the realities of today’s market.

John: How fast does a serious buyer need to move on a home?

Lane: Very fast. You need to be prepared to come in quickly. In many cases that means the very same day. Realtors are watching the inventory to see what is new and when you get that phone call from your agent, you have got to be ready to act.

John: If you need to pull out your checkbook on the spot, it sounds like buyers needs to be prepared even before they walk into the home.

Lane: Absolutely. You need to be pre-qualified for a loan before you start looking. That means you must have provided a lender with your work history, pay stubs and other documentation that is required to get a loan.

John: Let’s say you offer the full asking price and that is not enough. How do you decide if you want to get in a bidding war?

Lane: It may not be a pure financial calculation. It depends on how badly you want the home. You obviously don’t want to over-pay and have your basis way too high. But for some people, if the house really meets their needs and their finances, for very rational reasons they could be willing to pay a little more.

John: Is there a danger of getting carried away and bidding too much?

Lane: Yes. Talk to your Realtor to find out what he or she thinks is the fair-market value. Part of the Realtor’s job is to be objective and keep you from being carried away by emotion.

John: Any favorite tip for a buyer in a bidding war?

Lane: I always liked to have a buyer write down two numbers. The first: What do you want to pay? The second is what you are willing to pay. It’s not that you can’t scratch the number out and replace it with a higher one, but it always seems to help to have the numbers on a piece of paper before you get into the frenzy of negotiating.

John: What if you find yourself on the losing end of a bidding war?

Lane: At the end of the day, there is always more than one house that will typically work for most buyers. For most buyers, there are many houses that will meet their needs. It might just be a matter of time. You might need to wait another three months before you find the right home.

John: It must be hard if you have lost out on multiple offers for homes.

Lane: It is very taxing on buyers. Some buyers have bid on five homes and have lost five times. That is very stressful. Some people might need to take a bit of a breather before wading back into the market.

John: Lane, while most the stress in today’s market is on the buyer’s side, can you touch briefly on what it means for a seller pricing her home today?

Lane: First, you can’t count on a bidding war. The Denver/Boulder market, for example, is not anywhere near the frenzied market in the San Francisco Bay area during the peak, when you knew your price was going to get bid up.nThat said, a good Realtor can help you price your home correctly.

John: What will the Realtor bring to the table?

Lane: A Realtor will be able to tell you if you have very much competition in your area. You want to price it for today’s market and maybe in some sizzling markets maybe even a little ahead of the market. If well over 50 percent of the homes in your area are under contract, you might want to price it a little more aggressively.

John: But even in today’s improving market, you don’t want to ask for a ridiculously high price do you?

Lane: There is still a real risk of over-pricing. If you over-price your home and it becomes a stale listing, you can miss your shot at the spotlight.

John: Thanks Lane.

A monthly conversation between Lane Hornung and John Rebchook is a feature of InsideRealEstateNews.com. Hornung is President, CEO and C0-founder of 8z Real Estate, a sponsor of InsideRealEstateNews.com. For more about Lane Hornung and 8z Real Estate, please visit this link.

When are you going to discuss/disgorge on shadow inventory?
And, the double dip?
And, how stagnating incomes can support current/rising house prices?
And, why the InnerTubes™ have not destroyed the traditional broker commission of 6%?

Thanks for your comments Dave, and sorry I have not been able to respond to your comments on previous articles.

As far as the shadow inventory, I agree that it’s a long term unknown, but at this point, in the markets where inventory is absurdly tight (less than 2 or 3 months of supply), a release of more distressed inventory would be welcomed and easily absorbed in the short term. There is plenty of demand already in place.

Double dip? I’ll go on the record and predict that we will not see a double dip in the Denver metro market in the next 12 months (defined as prices falling below the post peak lows we hit in Jan/Feb 2009 as measured by Case Shiller). How about a gentlemen’s bet…I’ll take no double dip, you take double dip?

As far as stagnating incomes, I agree that incomes, and employment in general, are huge concerns for the real estate market. That said, we have some headroom in the affordability index to allow for modest price appreciation, with the emphasis on modest….no replay of the bubble days by any measure!

I will take your bet if you give me 1.50 case shiller points(120.21 March 2009 as a basis) So any number below 121.71 I would win over the next year. I agree with Peter, this seems like a pent up demand “dead cat bounce” rally. I think we run out of buyers soon. The lack of inventory shows a real lack of demand. In real estate, supply is a very good indicator of demand, because “move up buyers” tend to be sellers first. The high end market is already starting to roll over. Are you in?

I appreciate both of you responding to the bet I laid out…but you both modified my terms! Granted, I get your points, but the bet stands as first presented…no adjustments for inflation Dave (personally I was always suspect of what index to use for inflation in all my finance class formulas for converting nominal to real anyway!) and sorry Jason, not willing to spot you 1.50 Case Shiller index points.

It’s a straight up bet….I say no double dip in next 12 months (and to be as specific as possible – double dip is defined as the index falls below the post peak low as measured by the seasonally adjusted index of 120.21 hit in Feb 2009)

I thinks the odds are 30% we do test the lows again in the next year. However, being an owner of multiple properties, I would hate to root against my own best interest and a gentlemen’s bet does not give me any valuable hedging position. So I will pass, but for fun we can rehash this next year!!!!

I find it shameful that the brokers are cheer leading their own business without regard to the buyers and the risk they are putting them back into. Of course this time is different just like the last bubble. Yes, rates are low and there is a great marketing campaign going on to get people to buy homes at perceived discounts. But where is the other side?

Let’s talk about how great real estate is when interest rates surge and the market becomes illiquid. Are you ready for round II of the real estate bubble bursting?

Stop herding the sheeple and give buyers both sides of the story. There is risk and there is reward. Stop feeding the real estate greed and learn from recent history. I give this real estate bounce another 6-12 months max, if that.

ps. There will be a double dip b/c if you follow the economic trends, you will see the fake economy is moving back into recession, Europe is in there… it could go on but you are not supposed to be challenged to the other side of the story. But it will be made known soon.

@Peter
It has been my observation that most homes sold in the Denver Metro area over the past three years have been below construction costs, I don’t think that is a ‘perceived’ discount, I think that is a real discount. And what bubble are you talking about? The post is specific to the denver metro area, and according to Case Shiller the denver market only increased 38% for Jan 2000 to the peak in June 2006 (as opposed to the average metro area in the Composite 20 which increased 106% over that same time period). a 38% increase over 6.5 years is hardly a bubble.

That is the broker’s sales pitch, below replacement value. And it is a compelling value proposition but b/c something is cheap, doesnt mean it will not get cheaper. who is to say that is not just a “dead cat bounce” from the recent market sell-off?

That discount could grow even further (below construction costs)… In a no bid market, how much is your house worth?

Also, looking at home prices is not the full part of the equation when it is not compared to income, wealth, balance sheet of the buyer. That I guess is my point.

Focusing just on the supply side does not fully describe the whole picture as I see it.

Just looking for more balance. I came across this site and find it a much needed and valuable resource by the way. I just question the feeling of one side of the market belief, the one that most seem to be repeating to each other and as a contrarian, I like to step back and question that. For we hold short-term memories in today’s world and 2008 was not just about a housing bubble in the US, it was part of a credit-debt bubble which is even larger and a greater overall in size than in 2008. And if 2008 was not resolved, why to believe I should buy a new house at 60 cents on the dollar when it could be at 40 cents on the dollar in a year when all the current buyers are exhausted and the next supply wave (may) hits?

Unless you expecting a global depression, nuclear war, pandemic, etc….You should believe that housing prices in Denver are not going to drop because the Price to Rent ratio, and the sales price to construction cost ratio established the bottom of the Denver market in Feb 2009. Any attempt to breach that bottom will be meet will a flood of investor buying. FWIW, I am not a Broker or Agent, I am an investor.

I may be very wrong and regret this so called buying opportunity but I just dont have the full confidence the market is enjoying a greater amount of.

I have been a renter for many years, currently renting at a fraction a million dollar listed house despite the replacement costs being .60-.70 on the dollar…

I am also considering that real estate ownership is heavily subsidized by a broke government and so you add to the new taxes coming up and the uncertainties, I do not see how optimism here is fully justified. Carrying costs are very cash flow intensive and it can quickly flip the buyer or renter out. as I witnessed and continue to witness, real estate is not as liquid and will be for a while. This feels like a temp. relief from a depressed market (that is not done being depressed).

Maybe on the low to lower-mid end of the market it is attractive but look at the stats and future possible renters or buyers… Middle class is being squeezed, 50% of population has less than a few grand, if anything, in cash reserves. Debt overload and a large part of the economy subsidised by the government, which is broke but only sustaining its debt due to low rates; just like the consumer. Same goes with real estate buyers, if rates start to increase, they wont be able to afford so how exactly will this trend continue?

and if desperate sellers return b/c we see the return of the recession and possibly a depression, either the individual or investor or bank, will continue to add more inventory and the imbalance could return and drive prices down quickly again. These are not stable or certain times. Just wild extremes fueled by cheap credit, mis-allocation of capital and mis-information.

Your belief is that the recovery is here and the market has bottomed. That is the new buyers’ belief and that I believe is built off a very false premise. I would look for some balanced opinions to that side, I offer you one here partly.

Until the great credit-debt bubble is handled, I see an exhausted and vulnerable buyer and if they cannot buy with these incredible low rates and can only rent, what does that tell you about the renters’ finances. Somethings that I think one should consider.

Longer-term, even with the views above, I would tend to believe there are great upside possibilities. But that may be 5-10+ years away (?). Will be interesting to see how this plays out. Regards, Peter